Economies stalling despite being awash with easy cash

International / 21 August 2014, 08:00am

Local residents walk out of a supermarket in Shanghai yesterday. China posted mild consumer inflation for July, giving authorities room to further relax monetary policy, but deflationary pressure for producers remained stubborn. Photo: Reuters

Jeremy Gaunt London

CHINA’S economy is slowing. The euro zone’s is a flat line. Japan’s sank in the second quarter. Britain has wage deflation. The US economy is ticking over at best.

In a world preoccupied by geopolitical crises – from Ukraine, Iraq and Gaza to the Ebola outbreak in west Africa – the global economy has taken something of a back seat. But there are signs it is in trouble despite being awash with cash from record low interest rates.

Many policymakers across the world would like to move away from this ultra-loose monetary policy, which they introduced to drag their countries out of the financial crisis. But economies are not playing ball.

Essentially, the economic doldrums have pushed back the time when central banks can start the process of normalising monetary policy. Indeed, in many places it is more likely that central banks will loosen further than pull in.

Take China. Data last month showed cash flowing into the economy plunging to a near six-year low. The housing sector, around 15 percent of the economy, is also faltering. So although overall growth projections for the year remain roughly on track, the latest data have brought the potential for looser Chinese monetary policy.

“The shrinking amount of cash flowing into the economy will harm economic growth,” Chen Dongqi, the deputy chief at the Academy of Macroeconomics Research, a government think tank, said. “The window has been opened for cutting interest rates and the reserve requirement ratio.”

In a similar vein, the issue in the moribund euro zone is not one of reining in monetary largesse but of whether the European Central Bank (ECB) should extend it by buying government bonds in a quantitative easing programme.

The bank has thrown more than e1 trillion (R14 trillion) into the economy, much of it repaid, and is poised to inject up to another e1 trillion if necessary. Yet there was no growth across the 18-country bloc in the second quarter and inflation is running at a deflation-threatening 0.4 percent.

“The risks surrounding the economic outlook for the euro area remain on the downside,” ECB president Mario Draghi said earlier in the month.

Jacob Funk Kirkegaard, a fellow at the Petersen Institute of International Economics, reckons the main problem facing central banks is that the pillars of world economic growth are not level and economies are not working together.

“There is no country to pick up the slack,” Kirkegaard said. “From the perspective of the US consumer coming to the rescue of global demand, forget about it.” – Reuters